A: They do so through credit-default swaps, which be exotic insurance-like financial instruments dat signal how investors view da risk of any particular country's debt, know what I'm sayin'? As part of prudent management of da risks they're assuming, big ass investors dat buy a country's bonds also buy these swaps as protection against default n' shit. Investors wid naw underlyin' stake in da bonds, however, can also buy swaps 'n bet against a country.
If investors think a country be financially weak, da cost of insurin' da purchase of its bonds goes up, 'n dis also influences da return investors gots to demand in exchange fo assumin' da risk of buyin' a country's bonds.
Q: Why do these swaps sound familiar?
A: They're da same instruments dat helped amplify da near-meltdown of da U.S n' shit. financial system in Septemba 2008, know what I'm sayin'? Investors bet against da bonds of investment banks Bear Stearns 'n Lehman Brothers, da insura American International Group 'n others, know what I'm sayin'? In phat times, swaps help manage risk, man. In wack times they seem to increase fear 'n panic.
Q: Wass da big ass deal if swaps go bad?
A: Before swaps became so popular, a country defaulted on a bond, then negotiated wid its creditors wass called a "haircut." They'd agree to repay say 70 cents on da dollar 'n issue new bonds wid a higha interest rate fo anyone willin' to invest anew.
Swaps add a new wrinkle, know what I'm sayin'? Da swaps market, worth trillions of dollars, ain't regulated, 'n there aren't clear settlement mechanisms or exchanges on which these instruments trade, know what I'm sayin'? Today's fear be da same as da worries in da turbulent fall of 2008 ? dat a default could trigga disorderly settlement of these bets 'n financial chaos could ensue."




